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NMLP6350Team Project – Part 2Business model valuation: “Aquaponic Hotspot Business Model”

Tuesday, March 20, 2012By Group D:

Miriam Aguilar (211991031)Satyameet Ahuja (211334778)

Suzanne Pragg (203062932)Hiroyasu Sudo (211145257)Peter Wambera (210611788)



2

Brief Description of the New Business Model

Since we have changed our business model from the previous report, we summarize the new business model as a preface of this report.

Customer Pain:

Building owners have anxiety as to their rent income People living in Toronto ‘food deserts’ have barriers reaching fresh food

Business Model (Multi-Sided Platform):

Set up an aquaponic hotspot in a Toronto food desert The units would be modular (and they do seem to be) Hotspots could grow in intensity, but also diversity of locations We would start with 1 hotspot and see the growth in intensity and add locations The units would be set up in or around apartment buildings in Toronto food deserts

Partner with progressive building owners who purchase aquaponic equipment So capital costs of individual hotspots carried by owners Owners would do so to make their buildings more attractive to renters, and down the

road, allow them to charge higher rents Our business brings the farming and retailing expertise. We manage the units and sell

food products to building occupants, who currently do not have easy access to fresh food We would seek to have at least 1 staff from each building, but true farming expertise

resides with our company



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Contents Target Customer Analysis...................................................... ......................................................... 4

Market Analysis ..................................................... ........................................................... .............. 5

The Competition ................................................ ........................................................ ..................... 6

Risk ..................................................... ............................................................. ............................... 7Market Strategies ............................................... ........................................................ ..................... 8

Organizational Infrastructure................................................. ......................................................... 9

Legal Considerations .................................................. ........................................................ ............ 9

Financials ................................................... ....................................................... ............................ 10

Exit Strategy: ................................................... ........................................................ ..................... 11

Bibliography ...................................................... ........................................................ ................... 12



4

Target Customer Analysis

Who are they? : As stated in the business model overview, we will set up aquaponic hotspots by partnering with building owners. Our criteria for selecting the buildings will be to look for buildings in Toronto food deserts, which refers to areas with no healthy food retailers within a 1km radius (Martin ProsperityInstitute, 2010). Figure 1 showsthese areas in Toronto. Theseareas are characterized as low-income families. This impliesthat the reason why there are nohealthy food retailers is that the

potential customers in theseareas are not attractive for theretailers. In addition, the factthat these areas are not servedwell by the subway lines mayhave resulted in the deserts.

What are their behaviors andpriorities? : To analyze ourtarget market, the building owners in the food desert, we used a method called‘netnography’, which was pioneered by R. Kozinets, professor in marketing atSchulich School of Business. By conducting ethnographical research in the online space, thismethod enables us to figure out real consumer behavior, as opposed to somewhat biasedconventional methods. The key findings of our netnography research on the concerns that the

building owners have are: i) politics (especially taxes), which is the most frequently mentionedwords in the online BOMA (Building Owners and Managers Association) community.(Socialmention.com, 2012); ii) rent prices including the renter’s credits, real estate marketinformation, and factors that affect their rent prices, which are the main topic of the most viewed

blog in this online community, “Property Management Daily”. (Technorati, 2012); and iii) 91%of the owners use social media as a business tool (Toronto, 2011).

What is their need/pain? : Based on the netnography research, we concluded that the pain ofthe building owners is described as ‘anxiety’. Since they were directly affected by the financialcrisis in 2008, they feel insecure about their income. This is the reason why they are especiallyconcerned about the policies and the rent prices, and why they are eagerly trying to use the newtools for their business.

What is their willingness to pay? : We conducted a questionnaire survey to figure out the building owners’ willingness to pay for our product, however since it is hard to predict the ROIof this investment, we could not receive any accurate information. Instead, we decided tomathematically figure out the incentive of the owners. As the volatility of their income is themajor concern, we calculated the standard deviation of the rent prices in Toronto, σ =43, based onthe rent prices. (Kinnea, 2012) This means that the owners’ income may change by $43 permonth with 95% of probability. This risk amounts to more than $511 per year. As we assume

Figure 1



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List of Aquaponics System Providers • Aquaponic Gardening (Boulder, CO, USA) • Backyard Aquaponics (Success, W Australia) •

DIY Aquaponics (Orange Park, FLA, USA) • Friendly Aquaponics (Honoka’a, HI, USA) • Growing Power (Milwaukee, WI, USA) • Nelson + Pade (Montello, WI, USA) • Practical Aquaponics (North Maclean, QLD, Australia)• S&S Aqua Farms (West Plains, MO, USA) • Urban Aquaponics (Bundamba, QLD, Australia)

Entry barriers/ substitutes: Barriers to entry is considered to be low. We will elaborate on thisissue in the risk section. As shown above, people are seeking good quality substitutes to thecurrently available foods. Thus, the threat of substitutes is negligible..

Growth Trend: According to a community research conducted by University of Toronto, it is

forecasted that the low income population, whose incomes are more than 20% below the average,will grow by 16.4% by 2020. (Hulchanski, 2007) This group is not an attractive segment for foodretailers, or even if so, the quality of the products provided to this group will be questionable.Therefore, the food desert will continue to exist, and most likely to grow at a fast pace.

The Competition In terms of an organization selling aquaponics systems to low-income, high-density buildings inToronto, there would appear to

be zero direct competition.Aquaponics is a relatively newconcept, with little traction in

Canada. There is no localaquaponics Toronto chapter. Aself-help aquaponics websiteexists in Edmonton,www.edmontonaquaponics.org,however there is no similarCanadian site. At this website,almost all commercial (or retail)links suggested to purchaseequipment are in the US or Australia (see Figure4).

To summarize, the commercial and retail aquaponics market is in nascent phase, with no Torontoor Ontario presence, and with a fractured US presence. There would be appeared to be no threatof any of these suppliers competing with our business.

Other urban farming organizations, such as Foodshare, or Young Urban Farmers, would also not post a serious competitive threat, as they would either welcome our entry into the market, or findthemselves serving entirely different markets.

Similarly, the issue of food security is so broad, the size of Toronto’s food deserts so large, thatany solution will have hundreds of components. The likelihood of any one solution in the marketcompletely addressing the social problem is essentially zero.

Lastly, there would seem to be no credible competitive threat in terms of building improvement.A building owner looking to improve his/her building can do so in innumerable ways, so oneimprovement (e.g. better water pressure) does not preclude the addition of other improvements,such as an aquaponic system.

In conclusion then, the key assumption would be that competition is either non-existent, toofractured or non-competitive, and research would support this assumption. If this business is tofail, it will not likely be because we are out-competed.

Figure 4



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Risk There are multiple kinds of risk associated with this business plan. It is important to be aware ofall potential sources of risk before undertaking this venture so that every possible action can betaken to mitigate these risks and increase the viability of this business.

Potential Entry: The first source of risk would be from the potential entry of firms using similar business models. Though aquaponics itself and this business model specifically are new inToronto it can be easily replicated by those with access to the correct technology and thetechnical knowledge to be able to use and maintain the units adequately. Though the businessmodel (and the aquaponic units themselves) is new in Toronto there is nothing proprietary aboutthe technology and, as a result, there is not much our company could do to prevent another

business from sourcing and selling their own units to interested parties within the samegeographic market. Naturally, competition in the market would drive product prices down and, infact, there is no way of ensuring our company is not undercut by those entering the same market.However, we should try to differentiate our business as much as possible. One way this is done isto utilize the first mover advantage. This allows us to tap into the ‘blue ocean’ in which we can

expect high profitability and high growth. As long as we can grow rapidly, we can remaincompetitive to some extent even if there are low-price competitors since it is difficult for the

building owners to replace the units once installed. In addition, we could switch our supplier to amore cost-effective supplier if the competition intensifies.

Wrong Prediction: Another huge source of risk would be the chance that aquaponics – or theway we have presented it to potential customers through our business model – would not gaintraction among Toronto consumers. This technology is unlike any that exists in the Torontoagriculture market currently and there is a chance that will not be embraced by building ownersin general. If for whatever reason the technology is rejected, then the business model as it existsnow would inevitably be a failure. In this case, we should immediately cease our business model.

Therefore, we should constantly pay attention to the inventory level so as to sustain the liquidity.

Supplier: At present, our business plans to import these aquaponic units from a supplier in eitherthe US or Australia. The risk here is the chance of this supplier going out of business/bankrupt.Since the commercial and retail aquaponics market is in nascent phase, there is a chance that wemay be left with no supplier in the case our supplier goes out of business on short notice. Anydelay in sourcing these units (or parts or accessories for the units) could have a negative effectnot only on sales but on customer relationships.

Currency: As we purchase the aquaponic units from abroad, our procurement activity is alwaysexposed to currency risk. Although a conventional wisdom tells us that we could entirely hedge

this currency risk by using currency forward contracts, it is not easy for us to implement becausewe also need to keep the inventory level low. In other words, we would have to have so manylong-positioned contracts that our labour cost increases. In addition, the labour would need tohave a skill to settle these OTC contracts. This also adds up the labour cost. Instead, we could

pursue cash transaction without incurring accounts payables. This way, we could at leastnegotiate purchasing price with the supplier even though we are still fully exposed to the risk.



9

Organizational Infrastructure

In order to carry out our business plan, there are four different functionalities required.

Management/Governance: Decision making, maintaining relationships with key partners,representing a company as a legal entity (compliance), and coordinating all the otherfunctionalities. The CEO and the assistant will assume this task.

Sales and Marketing: Implementation of the promotional strategies described above and all thetransactional activities including supplier negotiation. The sales person assumes this task.

Finance: Accounting, seeking investors (see the finance section), budget management, and riskhedging. The CEO and the assistant will assume this task.

Technical Operations: Aquaponic unit delivery, installation, maintenance, and advisory.Assistance in selling foods to building occupants. The technical staff will assume this task.

To fulfill these four areas of functionalities, we will need eight employees:

CEO (1): Undertakes the management/governance and the finance functionalities. Fairknowledge of management, strategy, and finance is required. In addition, strong passion forsolving the food desert problem is required.

Assistant (1): Supports the CEO. Competitive communication skill and knowledge ofaccounting are necessary. Strong interest in the social problem is required.

Sales (2): Undertake the sales and marketing function as a team. Directly reports to the CEO.Experience in B2B sales, and knowledge of social media marketing and the real estate industryare required. Part of the salaries is commission-based to incentivize these staff.

Technical Staff (4): In charge of the technical operations and directly reports to the CEO as a

team. Knowledge of agriculture (especially urban farming) is necessary. Passion to solve thesocial problem is required. At the inception, we will require two employees. After 6 months, we plan to add another two depending on the sales growth.

Since most of the clerical functions are done by the CEO and the Assistant, the employees willwork from home, except the Assistant who will work at the CEO’s place.

Legal Considerations Legal Framework: As a food business, there are several key legal considerations, which include

but are not limited to: Register our business with Ministry of Business and Consumer Services Gain a municipal license Obtain a provincial operating license Secure proper municipal zoning approvals for our farming units Obtain a business number from Revenue Canada Registering for the PST Prepare for being employers, in particular compliance with Ministry of Labour

regulations and Workers Safely Insurance Board rules Securing business insurance



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Having regular health inspections Obtain a food handler’s certificate from Toronto Public Health

Our business will also require sufficient insurance for employee claims, and any food salesliabilities.

Legal Structure: This business operates as a private for-profit company to minimize reportingrequirements. Co-op could be another option because the building owners have an establishedcommunity, however it may be difficult to ask them to be members without considerable supportfrom the community leader such as the BOMA. Additionally, the somewhat hierarchicalgovernance style may not fit the characteristic of co-op, which delegates voting share to eachmember regardless of the amounts of their investment.

It is our assumption that we will require modest capital startup funds, as our business would startsmall and then scale up. If our organization could secure business development grants or externalinvestors, we would ideally structure as a for-profit business. This would allow our organization

to make quick decisions and retain maximum flexibility with decision making. Should start upcapital come from a foundation or government granting agency, our organization may be forcedto set up as non-profit, though not a registered charity. Forming as a non-profit is not desirable,as it limits the scope of activities the organization could undertake.

Financials

With Aquaponic units being installed in buildings with intent to sell the produce to the buildingoccupants, we will be selling the largest size units called the deluxe (Backyard Aquaponics). Inorder to map out our financial forecast, we make the following assumptions:

1. While the retail price for these units (including installation) is $11,475, we believe thatincluding the shipping costs we will be able to import this product at $13,000.

2. With limited time (30 minutes per aquaponic unit) and farming expertise required, we believe that on an average one technical staff will be able to cater to 12 aquaponic units aday in an 8 hour shift and will be paid at an hourly rate of $12 per hour.

3. We will require 2 technical staff for the first 6 months, and as number of units installedincreases we will require 4 staff in all.

4. Due to economies of scale, cost of producing the vegetables and fish will be 5% lowerthan what it would cost an individual to produce the same yield.

5. Sales personnel will be paid $3000 per month and a 3% commission on each sale.6. We will be able to sell 55 units in the first year. (6% of the BOMA members) 7. Any unsold produce will be sold to restaurants or local markets.

8.

The rent for the hotspot is one-year contract.

The financial forecast is shown in Figure 6. Based on this forecast, we calculated the following: Start-up Financial Need: $35,000 Net Profit Margin: Pessimistic = -35%, Baseline = 4%, Optimistic = 11% Break Even Units: 43 units Break Even Sales: $947,505



11

As explained in the risk section, we would have to withdraw from this business if the salestrajectory is similar to the pessimistic scenario. Therefore, we will provide the start-up cost inorder to make the liquidation process simple in case of the withdrawal. Assuming no interestcharge and no need to concern repayments, the business will be off the hook both from financingcost and a potential forced-bankruptcy.

Unit Price$ per unit Pessimistic # Baseline # Optimistic # Pessimistic $ Baseline $ Optimistic $

Revenue

Aquaponic Unit Sales 15,000 20 55 80 300,000 825,000 1,200,000

Veggies and Fish per Unit 7,035 20 55 80 140,700 386,925 562,800

Total Revenue 440,700 1,211,925 1,762,800

Costs

<Startup>

Aquaponic unit for the hotspot 13,000 1 1 1 13,000 13,000 13,000

Rent for the hotspot (1yr contract) 1,000 12 12 12 12,000 12,000 12,000

Start Up Costs (Website/Social Media) 10,000 1 1 1 10,000 10,000 10,000

<Fixed>

CEO salary 5,000 1 1 1 60,000 60,000 60,000

Assistant salary 3,000 1 1 1 36,000 36,000 36,000

Tech. Staff salary for the first 6 months 2,880 2 2 2 34,560 34,560 34,560

Tech. Staff salary after 6 months 2,880 2 4 6 34,560 69,120 103,680

Sales Personnel salary (Fixed part) 36,000 2 2 2 72,000 72,000 72,000

Utilities and Miscellaneous 1,500 12 12 12 18,000 18,000 18,000

<Variable>

Procurement for Aquaponic 13,000 20 55 80 260,000 715,000 1,040,000Veggies and Fish

(includin utilities and seedlin s costs)

1,743 20 55 80 34,865 95,879 139,460

Sales Personnel (Commission) 450 20 55 80 9,000 24,750 36,000

Total Costs 593,985 1,160,309 1,574,700

Net Profit (Total Rev‐Total Cost) ‐153,285 51,616 188,100

Expected quantities Total amount of dollarsItems

Figure 6

Exit Strategy:

Up to one or two years from installation, the units already sold to building owners will be takencare of by the technical staff. After this period, our service will be limited to advisory, assuming

that the owners can either learn the way to manage the units or find someone to take this job overat their expense. This model enables us to effectively and rapidly expand in the market without being over-staffed, in order to attain the first mover advantage.

This will help us to withdraw from this business in case of sluggish sales. In addition, the “just intime” business model, which refers to the low-inventory strategy in which we import the unitsupon orders from the building owners, will make it even easier to exit.

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